Fidelity explains its proprietary term as follows:Risk TestTo pass the risk test, a bond must be trading at a level that Fidelity believes is appropriate for its risk rating as defined by its yield curve. Bonds that do not pass the test are labeled Risk Outlier (RO). Bonds that pass the test are labeled Risk Pass (RP).In addition, all bond with credit ratings of Moody's Baa3 or lower, or S&P BBB- or lower will not pass the test and be labeled Risk Outlier (RO).For Corporate bonds:The Option Adjusted Spread (OAS) and Option Adjusted Duration (OAD) is calculated for each bond.Each bond is then compared to a series of Option Adjusted Curves that are created based on a larger universe of securities. For these bonds if the OAS is greater than the average OAS of bonds of lower credit quality with a similar OAD, the bond is considered a risk outlier. (For corporate bonds the classification of AA and AAA has been combined into a single rating: AA/AAA).For example: if a AA bond is trading at an OAS greater than the 'average' OAS of an A bond (for the same OAD) this is considered a risk outlier. Likewise for an A bond that trades at a higher OAS than the average BBB bond.

No doubt, as you grind through their explanation, you’ll lose interest in trying to figure out what Fido is saying, so here’s the gist of it. If they slap an ‘RO’ label on an invest-grade bond, the credit-rating rating is probably bogus.

OK, keep that thought in mind, and consider another. Wikipedia does a really good job of explaining what credit-ratings are, and it offers an colorful, informative chart that compares the notation systems used by the three majors. http://en.wikipedia.org/wiki/Bond_credit_rating If you count the number of notches, you’ll see they add to 21, which is way too many to be practical. One way to cut those 21 down to more manageable size is to map them onto Ben Graham’s three-fold scheme, as below.

I happen to know that, currently, ‘cash-equivalents’ aren’t worth looking at unless your intentions are to lose money. But I got to wondering whether investors new to the bond market could find anything worth buying in the “Defensive” category. So I ran the following scan at E*Trade. Show me everything rated A3/A- and above that offers at least 6%. Five issues were returned, three of which split-rated as triple-BBBs. The other two were Assured’s 7’s of ’34 and Sg’s 6’s of ’32. In other words, no more than two issues showed up of the thousand or so that would show up in the Defensive category if a minimum-yield weren’t established. In yet further words, it’s obvious these two have an anomalously high yield. Curious to see how Fido was quoting them, I pulled the info on Assured, on which it had slapped a RO label. Bingo! Suspicions confirmed.

To buy Assured Gty US Hldgs Inc’s 7’s of ’34 isn’t to buy an investment-grade bond, no matter how it is currently rated, nor is it to make a 'defensive' purchase. There's a speculative element embedded in that bond, or it wouldn't be priced as it is. Digging into the issuer's numbers might turn up the reasons. But doing so isn't something a 'defensive' investor would be doing. That's a task for an 'enterprising' one, which is the next category down in terms of effort and risk and, therefore, possible reward. In other words, each bond game has its own rules. To stray beyond one's self-set boundaries is just going to get you into trouble. (Graham's words, not mine.)

I’ll leave it to you to run a similar test for the other bond that showed up in the scan and for any bonds that might show up in each of the other categories. And if running these exercise seems to be a lot of work, well, tough sh*t. There's no such thing in the investing world as easy money, though, admittedly, once one's searching and vetting procedures have been refined and practiced, the gig does become no more intellectually demanding than brushing and flossing one's teeth. It's getting to that stage of fluid application where most investors (in fast food America) fail. They're unwilling to do the grind, grind, grind that is needed to pull money out of the securities casinos.

Charlie--------------------PS Sorry for the messed up table. If its details really interest you, scrape Wiki's page, dump it into Excel, and then do the reformatting there.

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